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Global Outsourcing Posts Slow Q1 Growth

by:
Sarah Joson

Monday, April 20, 2015 |

Research and consultancy agency Information Services Group (ISG) recently released its Outsourcing Index™. The report measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more. It found that first-quarter ACV is down by 18 percent to $5.1 billion, the lowest first quarter since 2006 where ACV averaged $6 billion. It is one of the slowest first quarters over the last 10 years. This slowdown was actually predicted by ISG last year when several large contracts were closed at the end of 2014.

Slow growth for global outsourcing

The 305 deals closed in this year’s first quarter are seven percent short compared to last year’s figures. However, the number of smaller deals (ACV of under $30 million) is similar to the volume posted by the first quarter of 2014 with a total of 269 contracts valued at $2.5 billion. As for larger deals where contracts are worth above $30 million, it declined 25 percent in value ($1.3 billion) and volume (28 contracts) compared to last year.

According to John Keppel, partner and President of ISG, the low volume and value of contracts during the first quarter of 2015 is based on the activity they saw during the last year’s end. However, he said it is not a reflection of this year’s activities. Smaller deals are seen to remain on the positive side in the coming months. But he warned that everything that goes up has to come down at some point, especially with the remarkable performance of 2014’s first and last quarters.

Meanwhile, challenges are seen for the value space, but the volume aspect remains strong as clients are looking for the best deals in a buyer’s market.

The report also stated that the volume of new-scope deals in the first quarter is similar to last year - flat. As for the annual value, it declined by 19 percent year-on-year. The number of restructured contracts also dropped by 20 percent versus last year, with ACVs declining by 16 percent.

Keppel also said new scope deals, which are usually the foremost type of deals in the first quarter, posted a weak start since 2001. As for the decline of restructured contracts in the first quarter, he reminded that restructuring is normal and a part of a contract’s cycle, and that 2014 ended on a high note.

Per segment, information technology outsourcing (ITO) is down by 27 percent from last year, with $3.5 billion in ACV - the lowest total since 2004. On the other hand, the business process outsourcing (BPO) space posted a 13-percent ACV growth which pushed its value to $1.6 billion. It also posted an 18-percent growth in contract volume. This is the second consecutive quarter that the BPO segment posted an ACV of over $1.5 billion, therefore making up for previous declines.